Is blockchain the future for transactions?

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Unless you’re an avid fan of cryptocurrency and trading in Bitcoin or Ethereum, you’ll be forgiven for not having a clue about what blockchain is or does. However, chances are that you’ve come across the word more and more frequently in the past five years. As with many things that gain prominence throughout the years, a point eventually arrives where not speaking about it comes at your own detriment. And while blockchain might be relatively new and may not have a big impact in your business right now, it is not to say that it cannot. There is a strong probability that it will become a favoured way of handling transactions in the future.

What is blockchain?

An in-depth discussion on blockchain will be filled with lots of jargon, but on a basic level, blockchain is a digital ledger (record) of transactions, capturing a string of details in chronological order. The data is encrypted but also decentralised (i.e. the information is spread across a wide network of computers).

What would make blockchain good for doing business?

  • Decentralised, private transactions

Since the data of transactions in a blockchain are not held on a single computer, it increases the safety of the transactions made, as there is no way to hack into a single database/server and retrieve all the data regarding your transactions. This doesn’t completely remove risk, but transactions will become a lot safer.

Furthermore, blockchain is a set of encrypted instructions, which means that there is a much greater focus on the privacy of transactions through a decentralised system.

  • Fewer restrictions on payment

When considering the difference between traditional financial institutions and payments made by way of blockchain there are major differences to be noticed:

    1. Blockchain is fast: Blockchain processes transactions in as little as 15mins and has no set open-hours, whereas banks often take time and are limited to operation only during certain parts of the day.
    2. Blockchain eliminates the middleman: The data transaction happens almost instantaneously, with a way to track the details of a transaction, without the need for an intermediary. This also reduces the cost of transactions and makes it more lucrative to receive payment through blockchain than by traditional means.
    3. Blockchain makes easy tracking of information/transactions possible: Businesses can easily trace transactions to their origins.
    4. Blockchain is essentially a programmed set of instructions: These are instructions to transfer value from one account to another, and thus makes it possible to build contracts into a blockchain so that there is less volatility and room for reneging on contracts.
    5. Blockchain is international: Many traditional transfers can have numerous restrictions based on information such as location and exchange rates. Blockchain payments can easily remove these restrictions as the blockchain isn’t bound to a single location or currency, but holds value of its own.

Where to next?

In many cases, the use of blockchain technology will grow without much input from businesses who will merely make use of the technology. So, while blockchain becomes more and more prevalent, it won’t be all that noticeable (except to the discerning eye).

Right now, however, blockchain technology and transactions are still in their infancy and in South Africa, will not start to see its application in everyday transactions any time soon. But just as with many new technologies that add to accessibility and ease of use for businesses, becoming an early adopter of the technology could hold a wide range of benefits and set you apart from your competitors. When that might be is still TBA, but what is sure is that you won’t be able to ignore it for too much longer.

Keep your eyes peeled and speak to your financial adviser before making any decisions regarding the way you handle your transactions.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Setting your business up for expansion

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When businesses expand, they often look beyond national borders. With such an expansion, there are several added advantages for establishing a holding company, which then owns the various group operating companies in different jurisdictions. Various aspects contribute to considering an ideal holding company location, and a brief discussion is outlined below.

Political stability
Political instability and constant political upheavals cause uncertainty within the jurisdiction and foreign countries that do business with that jurisdiction.

Ease of doing business
This does not specifically refer to actual business done by the company but relates to the associated (support) industries that one may encounter within the jurisdiction. Reputable banking institutions are required for transferring funds and investing capital; and competent service providers who know the industries, laws and practices.

Robust legislative framework
Laws and legal frameworks that allow the broader business plan and its associated structures to function are non-negotiables and the protection of property rights is essential. Beyond this, it is commonplace for many countries to implement (especially tax) laws to the detriment of citizens and resident retroactively. These jurisdictions could be harmful to an estate planning structure.

Ease of doing business with other jurisdictions
Considerations relating to tax- and trade treaty networks, business councils/chambers and foreign-owned company presence is important to ensure that a jurisdiction does not become isolated, and ceases to serve its intended purpose.

Structures and mechanisms to remove risk from the client
Some jurisdictions cater for structures such as trusts or foundations that may remove the inheritance- or capital gains tax burden or forced heirship rules from the business owner’s estate. This minimises tax liability on death, allows for the smooth succession of high-value assets, and ensures that management and control of assets remain central with professionals. Essential estate planning goes hand-in-hand with global expansion.

Substance requirements (laws)
As a requirement of meeting the “compliant” status that is issued by the OECD, jurisdictions have been required to reform and implement “substance laws”. To lay these out shortly, they are essentially a set of laws that ensure that no fraudulent money laundering activities take place through fictitious entities with fictitious members. In terms hereof, any structures that are established are required to meet the substance requirements as follows:

Carry out core income-generating activities in the jurisdiction (depending on which jurisdiction is chosen);
Ensuring that a ‘warm body’ is available to manage structures and that the “post box” effect is eliminated; and
At least a level of expenditure that is proportionate with the investing and management activities of the entity.

Advantageous tax and exchange control laws
A consideration in global expansion is choosing a tax-efficient jurisdiction that has easy-to-comply-with or no exchange control restrictions. These allow for ease in capital deployment, and benefits the owners when profits are derived. Taking advantage of tax-friendly countries to serve global expansion should, however, not be the only consideration.

The above provides only some of the primary considerations for a choice of headquarter location when expanding. It may also be that as part of an expansion, one jurisdiction is more suitable from an estate planning perspective, and another for business purposes, which tends to complicate matters. What is important, though, is a robust framework for the choice of jurisdiction, to ensure that ease of business and expansion efficiency may be possible.

SARS helping businesses lessen the tax load

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The last few months have been extremely tough for small business owners as a result of the global COVID-19 pandemic, and various lockdown measures that have created a challenging trading environment. The South African Revenue Service (“SARS”) has identified this hardship, and as a result, the National Treasury recently tabled the Disaster Management Tax Relief Administration Bill, which would assist micro, small and medium businesses should they seek to utilise this relief.

Although many of these measures have applied in practise, they have not officially been included in a tax bill and will soon have the necessary legislative effect (once promulgated).

To be a candidate to claim relief, a small business must:

  • Have a tax compliant status;
  • Conduct a trade during the year of assessment ending after 1 April 2020 to 31 March 2021, and earn gross income of R100 million or less; and
  • Not more than 20% in aggregate of the gross income can come from interest, dividends, royalties, rental payments, annuities, or remuneration received from an employer (generally aimed at passive income).

The relief offered by the Bill covers the following:

Pay-As-You-Earn (“PAYE”) deferral

Employers can claim a four-month deferral relief from 1 April 2020. To claim, two options are available;

  • Employers are still required to submit full PAYE returns (EMP201). SARS will issue a statement of account reflecting the relief; or
  • Calculate the total payable at 65% of the total.

After 7 August 2020, SARS will determine an amount payable in six equal payments to cover the outstanding (deferred) liability.

Employment Tax Incentive (“ETI”)

This programme runs from April 2020 to July 2020 and is claimed in the monthly EMP201. To claim, an employer is required to calculate the total ETI and 65% of the PAYE. The employer then utilises the lessor of the total ETI, or 65% of the PAYE liability to claim relief.

Provisional tax deferral

The period runs from 1 April 2020 to 30 September 2020 for the first payment period, and from 1 April 2020 to 31 March 2021 for the second provisional payment period. The gist of this assistance is that companies are required to pay only 15% of the first provisional payments and 65% (after deducting the first 15%) of the second payment. The remaining 35% will be payable on the third provisional payment date to avoid interest charges on late payment.

Accelerated value-added tax (“VAT”) refunds

From 1 May 2020, VAT vendors can file monthly VAT claims as opposed to every 2 months. Category A vendors can claim this relief from April 2020 to July 2020, and vendors registered under category B from May 2020 to August 2020.

The above relief measures contained in the Disaster Management Tax Relief Administration Bill are bound to bring some welcome cash flow and liquidity relief to struggling SMMEs in South Africa.

For more information on these relief measures, visit www.sars.gov.za/media/pages/tax-relief-measures.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Clearing loan accounts through dividends

Finance News , ,

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue, in response to an application, Binding Private Rulings (“BPR”) and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.

BPR 346 determines the income tax and dividends tax consequences of the redemption of intra-group loans by way of set-off against dividends payable. The ruling was made in connection with the interpretation and application of section 19 and section 64F(1)(a) of the Income Tax Act, dealing with debt waivers and dividends tax.

The below-mentioned companies belong to the same “group of companies” and are the parties to the ruling:

  • The applicant: A private company and a tax resident in South Africa;
  • Co-applicant A: A private company and a tax resident in South Africa;
  • Co-applicant B: A private company and a tax resident in South Africa; and
  • Co-applicant C: A private company and a tax resident in South Africa.

Description of the proposed transaction 

The applicant is an investment holding company that owns all the equity shares in co-applicant A and co-applicant B. Co-applicant B holds 100% of the share capital of co-applicant C.  The following loan accounts exist between the applicants –

  • Loan 1 receivable by co-applicant A from the applicant;
  • Loan 2 receivable by co-applicant A from co-applicant B;
  • Loan 3 receivable by co-applicant C from the applicant;
  • Loan 4 receivable by co-applicant C from co-applicant A; and
  • Loan 5 receivable by co-applicant B from the applicant.

The loans had their origin in ongoing advances between the group companies to one another to fund day-to-day operations. None of the funds were used to fund the acquisition of assets. The group wishes to eliminate the intra-group loans as far as possible.

The steps to implement the proposed transactions are as follows:

Step 1

  • Co-applicant A will declare a dividend to the applicant equal to the balance of loan 1, which will be left outstanding on the loan account.
  • Co-applicant A and the applicant will agree to set off the dividend payable by co-applicant A against loan 1 payable by the applicant to co-applicant A, resulting in the full settlement of both loans.

Step 2

  • Co-applicant C will declare a dividend to co-applicant B equal to the balance owing in respect of loan 3, which will be left outstanding on the loan account. Co-applicant C will cede loan 3 to co-applicant B in settlement of the dividend.
  • Co-applicant B will cede loan 3 and loan 5 to co-applicant A in part payment of loan 2.

Step 3 

  • Co-applicant C will declare a dividend to co-applicant B for an amount equal to the balance in respect of loan 4, which will be left outstanding on loan account. Co-applicant C will cede loan 4 to co-applicant B in settlement of the dividend.
  • Loan 2 and loan 4 will be set-off against each other. The net balance will be an amount owed by co-applicant B to co-applicant A in respect of loan 2.

Step 4 

  • Co-applicant A will declare a dividend to the applicant for an amount equal to the sum of the balances of loan 2, 3 and 5, which will be left outstanding on loan account.
  • Loan 3 and loan 5 will be set off against the dividend.
  • Co-applicant A will cede loan 2 to the applicant in settlement of the dividend.

Ruling by SARS 

The ruling made by SARS is as follows:

  1. No dividends tax will apply to the declaration of dividends in the various steps.
  2. The redemptions of loans 1, 3 and 5 by way of the set-off arrangements in step 1 and step 4 will, in each instance, constitute a “concession or compromise”. However, the set-off arrangements will in none of those cases amount to a “debt benefit” – therefore, none of the “debt waiver” provisions applies.

SARS further held that the ruling did not cover any general or special anti-avoidance provisions in the Act, which has been a condition on which they have recently issued rulings.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The de-merging of companies amid unbundling

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Introduction

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue Binding Class Rulings (“BCR”) in response to an application by a class or group of persons and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction. BCR70 deals with the tax consequences of recipients of listed shares in a company after an unbundling of its shares from the holding company. Although the ruling only applies to members of a specific class, it is relevant to take note thereof, since it offers guidance on how SARS interprets relevant provisions of tax acts. The ruling refers to the interpretation and application of section 46 of the Income Tax Act (the ITA) and section 8(1)(a)(iv) of the Securities Transfer Tax Act (the STT Act).

Class

The class members to which this ruling applies are all resident and non-resident shareholders of listed shares in the applicant company and reflected as such on the applicant’s securities register on the last day to trade.

Parties to the proposed transaction

In the current instance, the applicant was a resident listed company and an entity referred to as “ListCo” was a resident company and a wholly-owned subsidiary of the applicant, which is to be listed in due course.

Description of the proposed transaction

The applicant company comprises of three main business units. The purpose of the proposed transaction is to demerge one of these business units and separately list the unit on a recognised stock exchange. ListCo will have a primary listing on the JSE, whilst the listing of the applicant will be retained (i.e. the applicant will not de-list). To implement the transaction, the applicant will take several transaction steps, being the following:

  • The applicant establishes ListCo;
  • The applicant will distribute all its shares in ListCo to its shareholders (class members) as a distribution in specie as contemplated in section 46 of the ITA. This will happen after market closure on the last day to trade;
  • ListCo will be admitted to trade on the JSE and will make an initial public offering of shares on the listing date; and
  • The applicant will distribute its shares in ListCo to the class members who will be recorded and finalised on the record date.

Ruling

Although not a comprehensive list, the following are some of the more pertinent rulings that SARS made, which will bind the class members:

  • The distribution of the ListCo shares to the class members will constitute an “unbundling transaction”, as defined in the ITA.
  • Each class member must reduce the expenditure and market value attributable to its applicant shares by the amount so allocated to the ListCo shares. In other words, a proportionate allocation of costs needs to be made from the base cost of the Class’s share previously held.
  • No dividends tax will apply to the transaction.
  • The transfer of the ListCo shares to the class members or realisation agent will be exempt from STT under section 8(1)(a)(iv) of the STT Act.

Although taxpayers might not be members of the relevant class, it is always insightful to consider SARS’s interpretation of tax acts, as it could similarly apply in their circumstances.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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